Railroad union talks seem to have come to a breaking point, sparking fears that a strike could be initiated by the end of this week. These concerns are not new. The negotiations have been ongoing for two years now, but the final stretch has left few optimistic. As Reuters reports:

The brinkmanship comes at a sensitive time for unions, railroads, shippers, consumers, and President Joe Biden – who appointed an emergency board to help break the impasse.

Widespread railroad disruptions could choke supplies of food and fuel, spawn transportation chaos, stoke inflation, and cause $2 billion per day in lost economic output.

As of Sunday, 8 of 12 unions had reached tentative deals, the National Railway Labor Conference (NRLC) said. Those groups do not include SMART-TD and BLET, which represent about half of the 115,000 workers affected by the talks.

Sound bad? You’re absolutely correct, and further evaluation of the situation is unlikely to ease your fears.

The History of Railroad Strikes in the U.S.

Railroad strikes are nothing new in the fabric of U.S. history, due in part to the fact that conditions for railroad workers have often been exploitative and abusive at best and close to slavery at worst. It stretches back to the very construction of the infrastructure which would allow for cross-country supply transportation during the settling of the American West. As the Guardian explains:

From 1863 and 1869, roughly 15,000 Chinese workers helped build the transcontinental railroad. They were paid less than American workers and lived in tents, while white workers were given accommodation in train cars.

Chinese workers made up most of the workforce between roughly 700 miles of train tracks between Sacramento, California, and Promontory, Utah. During the 19th century, more than 2.5 million Chinese citizens left their country and were hired in 1864 after a labor shortage threatened the railroad’s completion.

The work was tiresome, as the railroad was built entirely by manual laborers who used to shovel 20 pounds of rock over 400 times a day. They had to face dangerous work conditions – accidental explosions, snow and rock avalanches, which killed hundreds of workers, not to mention frigid weather.

The first major strike came in 1877, but it didn’t come from workers in the West who had been suffering under inhumane conditions for quite some time. Instead, workers in the North – well before unions began to wield power – fought back against a series of wage cuts.

Source: Wikimedia in the Public Domain

The University of Houston’s Digital History Project put it most succinctly:

The Great Railroad Strike of 1877 was the country’s first major rail strike and witnessed the first general strike in the nation’s history. The strikes and the violence it spawned briefly paralyzed the country’s commerce and led governors in ten states to mobilize 60,000 militia members to reopen rail traffic. The strike would be broken within a few weeks, but it helped set the stage for later violence in the 1880s and 1890s, including the Haymarket Square bombing in Chicago in 1886, the Homestead Steel Strike near Pittsburgh in 1892, and the Pullman Strike in 1894.

The Pullman Strike marked the beginning of union power in the world of rail transportation, briefly making them one of the most powerful union forces in the country. And still, railroad companies continued to make the mistake of cutting the wages of one of the country’s most important labor forces, resulting in additional strikes in 1922 and 1946  – the latter including over 5 million workers as the WWII strike ban came to a close.

Though pockets of the railroad industry have rebelled since then, the consequences of those moments were limited. The consequences of a strike today, on the other hand, could be dire.

The Impact of Railroads on the U.S. Economy

One of the most important things to remember when discussing the railroads today is the sheer scope of the industry. As the Federal Railroad Agency states:

Running on almost 140,000 route miles, the U.S. freight rail network is widely considered the largest, safest, and most cost-efficient freight system in the world. [1] The nearly $80-billion freight rail industry is operated by seven Class I railroads [2] (railroads with operating revenues of $490 million or more) [3] and 22 regional and 584 local/short line railroads. [4] It provides more than 167,000 jobs [5] across the United States and offers ancillary benefits that other modes of transportation cannot, including reductions in road congestion, highway fatalities, fuel consumption, greenhouse gases, cost of logistics, and public infrastructure maintenance costs.

These figures, however, do not take into account the auxiliary economic impact of operations. For instance, the Association of American Railroads reports that the major railroads have spent more than $760 billion on infrastructure over thirty years. While major manufacturers spend about 3 percent of revenue on capital expenditures, American railroads spend around 19 percent.

And then, of course, there’s the economic impact of the actual transporting they do. Though they fall behind trucks as the primary transportation mode for commodities and goods, the numbers, as reported by digital supply chain platform Blume Global, are still significant:

In 2015, the total amount of freight moved domestically in the U.S. was 15.9 billion tons.1

Of that, around 10.8 billion tons was moved by truck, followed by 1.5 billion tons being moved by railway.

Imports and exports by railway accounted for around 144 million tons in 2015.

The amount of freight moved by railway is expected to rise to almost 2 billion tons by 2045.

The total value of domestic shipments in the U.S. in 2015 was almost $15 trillion. Of that, around $10.9 trillion was transported by truck, with railway transporting almost $445 billion.

Transporting goods by railway is most popular for distances between 250 to 500 miles and 1,000 to 1,500 miles.

All in all, the economic impact as a whole is staggering. A report from Towson University found:

The analysis found that Class I railroads have a wide footprint on the economy, impacting avariety of industries and occupations. The total impacts (including direct, indirect, and induced) are a result of industry spending on employee wages, as well as operating and capital expenses. […] According to RESI’s analysis, Class I railroads’ operations and capital expenditures supported over 1.1 million jobs (0.8 percent of all U.S. workers), $219.5 billion in output (1.1 percent of total U.S. output), and $71.3 billion in wages (0.9 percent of total wages in the U.S.).

These figures would be enough to make anyone considering the impact of a railroad strike wary. Disrupting an economic engine like that is bound to disrupt all the other moving pieces in an economy. Today’s state of affairs, however, raises the stakes even higher.

How a Railroad Strike Today Would Be Worse

It’s not exactly a secret that today’s economy is… well, fragile to say the least. Though there have been plenty of debates over whether we’re in or headed towards a recession, singular data points are increasingly less convincing against a tapestry of warning signs.

One of the biggest issues on the table is high inflation. As the Fed desperately scrambles to reign it in, it’s worth noting that a railroad strike could – no pun intended – derail those efforts in serious fashion.

The pandemic created economic conditions the market was not ready for, and we’re not just talking about lockdowns – though that certainly played a role. Demand during this period shifted dramatically from services to goods, leading to increased transit demands and costs that market was similarly unprepared to shoulder. Add to this a trucker protest earlier this year, and it’s no surprise that supply disruptions likely added to the inflationary environment.

So now let’s put the brakes on the railroad industry for who knows how long. That disruption is just as likely to hit consumer prices, potentially countering the efforts of the Fed to directly address inflation. The problem there is that those rate hikes are already hurting a questionable housing market, and more hikes seem likely in the future.

So you have high consumer prices, questionable consumer confidence, a faltering real estate market, probable continued rate hikes, markets mirroring 2008 correlation levels, and another likely disruption to supply chains. It’s a combination no one wants to see, especially amid global economic turmoil and warning signs that the Queen’s death and the associated ceremonial elements could plunge the U.K. into a recession faster.

How to Prepare for the Impact of a Railroad Strike

We’ve written before about investing during periods of inflation. The key, in many ways, is to not panic. Investing in periods of protracted crisis requires a similar approach, but may indicate a need to recalibrate your portfolio.

Many continue to argue that the key is a traditional approach to diversification – ensuring you have exposure to typically inversely correlated asset classes. Others, however, point to the fact that such an approach failed a great many investors during the 2008 crash. They are not entirely wrong, but there’s also the fact that diversification + patience led many to substantial gains during the subsequent recovery to consider.

There may, however, be ways to maintain diverse exposure while also limiting downside exposure. In addition to shifting more to safety plays like bonds and cash, adjustments to stock market exposure could also prove beneficial by limiting downside risk while maintaining skin in the game.